If you’re building a SaaS, MSP, ITAM, or ITAD business with the eventual goal of attracting private equity investment, there’s a fundamental question you need to answer:
Most founders focus on top-line revenue growth. And while growth matters, it’s only one piece of a much more complex valuation puzzle. Understanding how PE firms actually think about underwriting can mean the difference between a mediocre exit and a deal that rewards the value you’ve built.
Let’s review the framework.
When a PE firm evaluates a tech-enabled services business, they’re not just buying revenue—they’re buying predictable, defensible cash flow with clear paths to operational leverage. Here’s what they’re really assessing:
PE firms distinguish between good revenue and great revenue.
Good revenue:
Great revenue:
Why this matters: A $10M business with 95% recurring revenue and 120% NRR will command a significantly higher multiple than a $15M business with 60% recurring revenue and 90% retention. The former has compounding growth built into its revenue base; the latter is constantly replacing lost customers.
Actionable insight: Shift contract structures toward multi-year commitments with usage-based expansion clauses. Track and optimize NRR as obsessively as you track new bookings.
PE firms live and die by three metrics in SaaS and tech services:
The benchmark: A healthy LTV:CAC ratio is 3:1 or better. If you’re below 2:1, you have a growth problem disguised as a unit economics problem.
But here’s what most founders miss: PE firms also care about CAC payback period. If your CAC is $20K and your gross margin is 70%, but it takes 24 months to recover that investment, you’re burning cash to grow—and that creates financing risk.
The ideal: CAC payback in 12 months or less, with demonstrated ability to maintain or improve that metric as you scale.
For MSP and managed services businesses: Unit economics look different but follow the same logic. PE firms want to see:
Actionable insight: Model your payback period under different growth scenarios. If scaling sales requires you to extend payback periods, you need to rethink your go-to-market motion before you talk to investors.
Unit economics refers to the revenues and costs associated with a single “unit” of your business model—understanding profitability at the most granular level before scaling.
Good unit economics means you’ve found a repeatable, profitable way to acquire and serve customers. Poor unit economics means scaling makes problems worse—you’re paying customers to use your product.
Example: A SaaS company charges $100/month with 70% gross margin ($70 profit/month). Customers stay 3 years.
• LTV = $70/month × 36 months = $2,520
• If CAC = $750, then LTV:CAC = 3.36:1 ✅
• CAC Payback = $750 ÷ $70/month = 10.7 months ✅
Key Metrics:
• LTV:CAC Ratio — The fundamental metric
– 3:1 or higher = Healthy
– Below 2:1 = Concerning
• CAC Payback Period — How long to recover acquisition cost
– Under 12 months = Excellent
– 12-18 months = Acceptable
– Over 24 months = Risky
Core Components:
What is a “unit”? It depends on your business:
• SaaS company: One customer or subscription
• E-commerce: One product sold or order
• Marketplace: One transaction
• MSP/Services: One client account
Revenue growth is table stakes. What PE firms are really underwriting is your ability to turn incremental revenue into incremental profit.
This is where AI, automation, and operational maturity come into play.
PE firms ask:
Red flags:
Green flags:
For ITAM/ITAD businesses: Compliance-driven businesses have natural operating leverage because the regulatory framework creates barriers to entry. If you’ve built proprietary workflows, risk management frameworks, or reporting tools that competitors can’t easily replicate, this becomes a key differentiator.
Actionable insight: Build a bridge model showing how EBITDA margins expand as revenue scales. If you can’t demonstrate this, you’re signaling that you haven’t built a scalable operating model.
PE firms don’t invest in “good” businesses. They invest in businesses that are defensible and have clear paths to market leadership.
What they’re evaluating:
Key question: If a competitor raises $10M tomorrow, what prevents them from taking your customers?
Strong answers include:
Actionable insight: Map your competitive advantages and be brutally honest about which are durable vs. temporary. If your primary moat is “we execute better,” you don’t have a moat—you have a management team. And management teams are replaceable.
Here’s an uncomfortable truth: PE firms are betting on the business, not just the founder.
They need to know:
Red flags:
Green flags:
Actionable insight: If you’re 18-24 months from a potential transaction, start hiring one level above where you are today. Build the team that a $50M business needs, even if you’re currently at $20M.
Once PE firms have assessed these five pillars, they build a valuation model based on:
Here’s where founder knowledge gaps become expensive:
Most founders focus exclusively on revenue multiples (e.g., “SaaS companies sell for 5-8x ARR”). But PE firms are actually underwriting EBITDA multiples and working backward to implied revenue multiples based on your margin profile.
Example:
If both businesses trade at 8x EBITDA, Business A is worth $16M (1.6x revenue) and Business B is worth $32M (3.2x revenue).
The insight: Margin expansion is just as valuable as revenue growth—sometimes more so.
If you take nothing else from this article, track these metrics religiously:
For SaaS businesses:
For MSPs and managed services:
For ITAM/ITAD businesses:
Understanding how PE firms underwrite your business doesn’t guarantee a great outcome—but not understanding it almost guarantees a mediocre one.
The best founders enter fundraising or exit conversations with clarity about:
If you’re building a tech-enabled services business with an eye toward institutional capital, start thinking like an investor today. Because when you eventually sit across the table from a PE firm, they’ll have already run the numbers.
The question is: will you?
This is the first in a monthly series on private equity, capital structure, and valuation strategy for tech-enabled services companies. Next month, we’ll tackle a controversial topic: Does your AI investment actually justify a higher multiple—or is it just expensive overhead?
Please reach out to Mark Gaeto and follow our LinkedIn page for more insights on building investable, scalable tech services businesses.